High Frequency Trading (HFT) is algorithmic trading characterized by extremely high speeds, high turnover rates, and high order-to-trade ratios. HFT firms use sophisticated algorithms and co-located servers to execute trades in microseconds.
Characteristics
- ⚡ Execution speed: microseconds
- 📊 Thousands of trades per second
- 🤖 Fully automated algorithms
- 🏢 Co-located near exchanges
- 💰 Small profit per trade, high volume
HFT Strategies
- Market Making — Provide liquidity, profit from spread
- Statistical Arbitrage — Exploit price differences between correlated instruments
- Latency Arbitrage — Profit from speed advantage
- Event Arbitrage — React to news faster than others
Impact on Retail Traders
✅ Increased liquidity ✅ Tighter spreads ⚠️ Can cause flash crashes ⚠️ Unfair speed advantage ⚠️ Not accessible to individuals
Regulation
HFT is controversial and subject to increasing regulation:
- EU MiFID II — strict HFT rules
- US SEC — monitoring and circuit breakers